A Great New World? China’s Industrial Land Market Post-2007

Market forces played a negligible role in the allocation of industrial land before 2007 in China. Since 2007, the central government has launched a reform that strictly implemented two policies: 1) all the urban industrial land must be sold through public auction; 2) there is a minimum land price (MLP) constraint on industrial land transaction. This paper investigates the micro-foundations of the industrial land market in urban China post-2007. In this market, the local government as monopoly supplier auctions off industrial land in order to gather land sales revenues and boost local industrial development, subject to an MLP regulation from the central government. Using a large land-transaction data matched with county-industry-specific characteristics, our empirical analysis finds that: first, the industrial land markets have been fledging in China, fostered by the reform since 2007. Specifically, in contrast to before the reform, the industrial land sale prices become pretty responsive to both the demand factors (e.g., industry agglomeration and coagglomeration, local economic development) and the supply factors (land cost) of the market; moreover, in terms of quantity, more land is sold to industries with higher degree of specialization or concentration in a county, suggesting improved allocation efficiency. Second, local governments selectively support industries in their land supply decisions. We find that local governments tend to sell more land at lower prices to those industries that are strategically important (classified as priority industries) or that can bring higher coagglomeration externalities to a county. Third, although about 70% of land transactions in our sample are not bounded by the central government’s minimum price constraints, still the MLP constraints are binding in 55,000 land transactions amounting to a total land area of 2,824 square kilometers, and costly downward adjustments are involved there. Our analysis reveals different preferences between local governments and the central government. Compared with local governments, the central government tends to value less the coagglomeration externality in developed regions. Also the central government tends to be more concerned about the social cost of land supply than local governments in general.